The Dow Jones Industrial Average, a price-weighted average of 30 blue-chip U.S. stocks, broke a record on Tuesday, closing at 14,253.77, beating the previous high of 14,164.53 set on Oct. 9, 2007.

Back then, Apple had just introduced its first iPhone. The U.S. housing market had not yet imploded, and the financial crisis that brought down Lehman Brothers was still a year away. General Motors wouldn’t file for bankruptcy for another two years.

“Equity markets are probably starting to sniff out stronger growth in the U.S. economy by the second half of the year,” said Robert Kavcic, a senior economist with BMO Capital Markets.

He believes the strong stock market is influenced by the U.S. Federal Reserve’s monetary stimulus policy — an open-ended mortgage-backed security purchasing program. Fed chairman Ben Bernanke has vowed the program would continue indefinitely until the economy has fully recovered.

“Looking out over the next year or two, just given that the economy is going to strengthen and the Fed is going to remain quite accommodative, it is a very healthy environment for stocks,” Kavcic said.

Add to that the recent round of corporate earnings that were better than forecast, in part because analysts pulled back on expectations late last year due to fiscal cliff worries in the United States.

Investors appear to be shrugging off concerns about a slowing U.S. economy due to payroll tax increases and the political stalemate in Washington that saw an automatic $85 billion (U.S.) in government spending cuts start to go into effect last week.

If politicians fail to a reach a deal, economists warn that the so-called sequestration could shave up 0.6 per cent from GDP growth, estimated at 2 per cent in the United States for this year.

“To be honest, it looks like the equity market is just looking past that,” Kavcic said, “towards a much more powerful trend, which is a recovering U.S. housing market.

“That would have a positive spinoff on construction activity and firmer consumer spending by the second half of the year,” he said.

It is a remarkable comeback for the Dow, which has more than doubled since its low of 6,547.05 in March, 2009.

But Eric Kirzner, a professor at the Rotman School of Management, cautioned that investors who bought an index product linked to the Dow in October, 2007, would have earned essentially nothing five-and-half years later, factoring in some dividends, taxes and inflation.

“If you were lucky enough to buy in at March 2009, at the absolute bottom, you would be up 115 per cent, or more than 21 per cent annual compounded,” he said. “That’s historically, a terrific return.”

But Kirzner then analyzed an investment bought on March 5, 2000, before the Internet bubble burst — the return is 2.6 per cent annual compounded, one of the worst 13-year periods.

“This market is saying economic conditions are improving,” he said, but economic growth remains slow and interest rates have little room to fall. “It’s hard to see very strong returns in the years ahead.”

And not all sectors have fared well. The NASDAQ, which is made up mostly of technology stocks, was up 42.10 to 3,224.13 on Tuesday, but is still far off its previous high of 5,048.62 in March, 2000.

CAW economist Jim Stanford noted that the stock market highs come as Americans are still struggling.

“Stock markets are forward-looking,” he said, noting U.S. corporate profits are very strong even though spending power remains weak. “This record clearly reflects not just the current profits, but what people think is coming down the pike.”

The TSX also had a strong day, closing at 12,736.04, up 0.22 per cent. But the Canadian stock market is expected to continue to lag over the next year or two, partly because it won’t benefit directly from the U.S. housing recovery.

As well, the energy and resources sector is heavily weighted within the TSX, so it is being hurt by discounted Canadian oil prices, with little change expected in the coming year.

“That means our stock market is kind of stunted,” Stanford said. “We’re still 15 per cent below where we were in 2008. And we’re not that much above where we were in 2000.

“Canada’s stock market has languished for 13 years now. I think that reflects the risk of too much resource dependence,” he said, noting the Dow is a much more diversified index, with some companies doing well, while others are not.

With files from Star’s wire services

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